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Indonesia steps up scrutiny of related-party transactions

The Indonesian Tax Office (ITO or DGT) is proactively approaching taxpayers and requiring them to answer queries and questionnaires.

The ITO has also asked the taxpayers to attend a training seminar conducted by the transfer pricing team from its head office. 

While no specific documentary requirements have been issued, it is clear that retaining detailed documentation that supports transfer pricing arrangements is now more important than ever. (DGT Regulation No. PER-39/PJ/2009, dated 2 July 2009; DGT Circular Letter No. SE-96/2009, dated 5 October 2009)

Included among many procedural changes announced in July is the requirement for three new related-party transaction forms to be submitted together with the corporate income tax return for fiscal year 2009 (accounting years ended after July 1 2009):

· Form 3A: Full details of all related parties transacted with and details regarding the transactions

· Form 3A-1: Fifteen yes/no questions regarding documentation held in relation to the arm’s-length principle, such as records held in relation to related-party transactions, comparative documentation and the transfer pricing calculation method

· Form 3A-2: Details regarding related-party transactions with companies in tax haven countries

In addition to these forms, the Indonesian Tax Office has approached a number of taxpayers with detailed transfer pricing and functional analysis questionnaires.

Also, local tax offices are seeking to use the tax audit process to challenge the transfer pricing policy adopted by various taxpayers. The Indonesian Tax Office has in certain cases sought to revalue related-party charges, and/ or made an assessment to treat certain related-party payments as a disguised dividend.

In October, the Office published a circular letter providing, as guidelines, benchmarking ratios that it would expect to see within certain industries. This includes ratios such as gross profit margin and operating profit margin. As these will be used in targeting taxpayers for transfer pricing queries and audits they may provide an indication as to when the Indonesian Tax Office is likely to challenge a given transfer price.

Recent regulations and a noticeable change in the Indonesian Tax Office’s approach indicate that related-party transactions are likely to come under increasing scrutiny in the coming years and that it may seek to assess a greater level of profit arising within Indonesia. As a result, taxpayers need to be aware that additional diligence, including full transfer pricing reviews, may be warranted to help show that the transfer pricing policy adopted is reasonable and appropriate.

Graham Garven, Partner, KPMG Hadibroto, graham.garven@kpmg.co.id



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